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Welsh Rent Settlement 2019/20 – A Centrus Guidance Note

The purpose of this note is to provide early views and guidance to support business planning for Welsh Registered Social Landlords (RSLs), in respect of the recently announced rent settlement whereby rents will be pegged at CPI only for 2019/20.


  • Welsh Government (“WG”) announced last week that the rent settlement for the next financial year (2019/20) will be CPI only, with CPI set at 2.4% based on the September 2018 level.
  • This compares to the previous five years, where RSLs in Wales have been able to increase rents by CPI + 1.5%, with the option to add another £2 per week to catch up with the Target Rent Band level (5% tolerance from Target Rent) for properties which were below the target rent level.
  • This settlement is viewed as an interim arrangement while WG ministers await recommendations from the ongoing independent “Review of Affordable Housing Supply in Wales”, due to report by the end of April 2019.
  • WG has a target to see 20,000 affordable homes delivered in the 2016-2021 Welsh Assembly term, with RSLs signing a pact to build at least 12,500 of these. Part of the remit for the ongoing Affordable Housing Review – chaired by Lynn Pamment, a partner at PwC – is to examine “whether more can be done to increase the supply of affordable housing in Wales”.

Experience Arising from Rent Cuts in England

  • The Budget in July 2015 announced a 1% rent cut for four years. This was a break with convention by Government which overturned a then recent commitment that rent increases could be set at CPI + 1% for 10 years and had a material impact; the compound differential between CPI + 1% and minus 1% over four years is substantial.
  • In our view it was driven by (i) a desire by Government to control the increasing Housing Benefit bill; (ii) a perception that Registered Providers (“RPs”) in England were inefficient, and (iii) a view that RPs should share the pain of austerity given that many of their tenants were under pressure, as were local authority landlords.
  • Despite this unwelcome intervention by Government, our experience is that generally RP clients of Centrus found operational savings to counter the loss of revenue from rents.
  • We have not seen a comprehensive analysis of the impact on development or wider service provision. At a big-picture level the sector has sustained development levels, however to what extent development would have been higher is not clear.
  • There is however a greater body of evidence that “add-on services” have been pared back versus plans predating the rent cut announcement.
  • Setting aside the one-dimensional capacity question it is clearer that the policy change led to a hiatus in activity as underlying business plans were revisited. In many cases this also included a wider re-shaping of development activity to include a greater level of developing homes for sale (whether outright or on a shared ownership basis). However, changes to prevailing grant regimes have long driven this shift and so cloud the standalone impact of the rent change.
  • It is a matter of debate as to whether it fuelled a wave of merger activity but a number of business cases did reference a greater drive to seek cost efficiency from partnership to meet the squeeze on revenue.


Summary of Centrus Guidance

1. Business Planning Implications

  • Welsh RSLs will now need to work the implications through their business plans starting with budgets for 2019/20 which in many cases will be in drafting now. The key challenge is what rent assumption to include for FYE2021 onwards with a lack of guidance from WG beyond 2019/20.
  • Centrus favours a central expectation of reversion to the assumption held in your business plan prior to the rent settlement announcement post 2019/20 (i.e. CPI plus).
  • WG is committed to increasing supply of homes and a long term squeeze on rent is counter-productive to this agenda; for this reason we expect any adverse rent settlement to be transitory like the English experience. Ultimately, rents are linked to affordability and over the medium term we would expect to see real salary growth.
  • However, in tandem with this central expectation we recommend a sensitivity with CPI-only rent growth is constructed.
  • Lenders/investors are likely to look for this sensitivity and RSLs should give consideration to managing the business on this basis until there is clarity for ongoing policy. It will demonstrate good governance to be able to provide this sensitivity and to demonstrate that risk appetite has been informed by its due consideration.

2.Scenario & Stress Testing

  •  We cannot advise on stress testing assumptions and/or mitigations on a generic basis.
  • Notwithstanding this, we recommend a CPI flat rental assumption is added to the arsenal of stresses modelled.
  • It is also recommended that potential changes to the treasury strategy be implemented to mitigate situations that might arise where the business plan is “under pressure” in a downside scenario.

3.Scheme Appraisal

Other than the rent position for 2019/20, the ongoing assumption will have an impact on scheme appraisal. This will be limited where rents revert to CPI plus, but more material if a more conservative CPI flat view is taken. This could impact investment decisions, particularly where schemes are marginal under a CPI plus regime.

4.Security Valuation Issues

In England, following the change in rent settlement, EUVSH values for security did not see any immediate change as a result of the announcement, but the EUVSH values dropped each year as the rent reduction applied.

The impact here is likely to be far more muted and initial reactions from valuers indicate little if any change in valuation where a return to CPI-plus is assumed. This should be discussed in the context of any ongoing / forthcoming valuations work and particularly for any RSL with a limited availability of headroom.